[Our summary of the IRA is here.]
On August 16, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law, the largest investment in the clean energy transition in the history of the U.S. While the modeling indicates that this bill will lower inflation while significantly mitigating for the climate crisis, now comes the question of the nuts and bolts of implementation as many of the new tax provisions become effective on January 1, 2023. While there is more news to come on this front, here is what we expect.
Tax Credit Implementation
For existing credits little work is necessary as the legislation initially–and immediately–extends those provisions and restores their original value. For new credits, like the investment tax credit for energy storage, microgrids, and interconnection, or modified credits like the electric vehicle provision, the Treasury Department will need to move quickly to design guidance on how projects will be deemed eligible, as the legislation requires such guidance be available no later than December 31, 2022. And of course, for all credits both old and new the Administration will have to issue additional guidance on how companies can comply with labor provisions, qualify for direct pay, and receive bonus credits for building in low-income and/or energy communities.
Adding another facet to this work, the legislation calls for the tax code to switch to the “technology neutral” model based upon reaching certain greenhouse gas reduction targets beginning on January 1, 2025. This will require the Biden Administration to run a parallel process to establish the rules and guidelines for that structure.
Implementing the IRA will require an unprecedented effort by the Environmental Protection Agency and the Departments of Energy, Transportation, and Treasury. While the Treasury Department will lean on other agencies to provide expertise, it is simply impossible for internal staff to envision all the ways in which the law will impact specific companies and technologies. It will be critical for companies to directly engage throughout this process to ensure that their business model is not unintentionally excluded from consideration.
One need not look any further than the way in which the Internal Revenue Service (IRS) implemented the eligibility of energy storage technologies to qualify for the Investment Tax Credit when paired with a solar project, to see how such guidance can stymie development. That guidance, issued over a decade ago, made clear that at least 75 percent of the eligible battery’s charge had to always come from the solar facility; if it was determined via an audit that that requirement was not being met, the IRS had the right to “claw back” the value of the credit from the developer. These standards had a cooling effect, disincentivizing the inclusion of storage in such projects.
In addition, provisions on energy equity, consumer-facing incentives, and new EPA clean transportation, financing, and power production programs will all require input from stakeholders—both businesses and non-profits—to help shape those initiatives and set them up for success.
As part of Senator Manchin’s agreement with Senate Majority Leader Schumer to advance the IRA, Leader Schumer agreed to consider legislation this fall that would reform permitting policy. If passed, it will facilitate faster permitting for energy projects of all types. Below is a summary of that legislation. Given the potential impact on clean energy development, we would strongly encourage our clients to engage with members of Congress on this provision right away. Much like the regulations set forth to comply with the IRA, the rules stipulated in this legislation will impact all types of development moving forward.
1. Designate and prioritize projects of strategic national importance.
- Direct the President to designate and periodically update a list of at least 25 high-priority energy infrastructure projects and prioritize permitting for these projects;
- Require a balanced list of project types, including critical minerals, nuclear, hydrogen, fossil fuels, electric transmission, renewables, and carbon capture, sequestration, storage, and removal; and
- Set criteria for selecting designated projects includes: reducing consumer energy costs, improving energy reliability, decarbonization potential, and promoting energy trade with our allies.
2. Set maximum timelines for permitting reviews, including two years for National Environmental Policy Act (NEPA) reviews for major projects and one year for lower-impact projects.
- Require a single inter-agency environmental review document and concurrent agency review processes;
- Designate a lead agency to coordinate inter-agency review;
- Expand eligibility for the Federal Permitting Improvement Steering Council (FPISC) streamlining and transparency programs to ensure smaller energy projects, critical minerals and mining, and other key programs can benefit from FPISC. Provide FPISC funds to accelerate permitting; and
- Improve the process for developing categorical exclusions under NEPA.
3. Improve Section 401 of the Clean Water Act.
- Require one of four final actions within one year of certification requests: grant, grant with conditions, deny, or waive certification; and
- Clarify that the basis of review is water quality impacts from the permitted activity, based on federal, state, and Tribal standards;
- Require certification applications to include available information on potential water quality impacts;
- Prohibit State or Tribal agencies from requesting project applicants to withdraw applications to stop/pause/restart the certification clock; and
- Require States and Tribes to publish clear requirements for water quality certification requests, or else default to federal requirements.
4. Address excessive litigation delays.
- Set statute of limitations for court challenges;
- Require that if a federal court remands or vacates a permit for energy infrastructure, the court must set and enforce a reasonable schedule and deadline, not to exceed 180 days, for the agency to act on remand; and
- Require random assignment of judges for all federal circuit courts.
5. Clarify FERC jurisdiction regarding the regulation of interstate hydrogen pipeline, storage, import, and export facilities.
6. Enhance federal government permitting authority for interstate electric transmission facilities that have been determined by the Secretary of Energy to be in the national interest.
- Replace DOE’s national interest electric transmission corridor process with a national interest determination by the Secretary of Energy that allows FERC to issue a construction permit;
- Require FERC to ensure costs for transmission projects are allocated to customers that benefit; and
- Allow FERC to approve payments from utilities to jurisdictions impacted by a transmission project.7. Complete the Mountain Valley Pipeline.
Require the relevant agencies to take all necessary actions to permit the construction and operation of the Mountain Valley Pipeline and give the DC Circuit jurisdiction over any further litigation.
We are so proud of the work our firm and our clients did together to develop many of the policies and programs in the IRA. Now, strategically engaging the Administration and Congress during the implementation phase will ensure positive outcomes and prevent negative ones. Our 38 North team has the experience and relationships to ensure the law is put into effect in a manner that works for your mission or business model. We would love to hear from folks who could use our assistance!